Reserve Bank of India recently made an amendment to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 dated May 20, 2016 by way of insertion of new Regulation 10A (“Regulation”). The new Regulation provides that when a transfer of shares/security between a resident buyer and a non-resident seller takes place, twenty five per cent of the total consideration can be paid by the buyer on a deferred basis within eighteen months from the date of the transfer agreement. This window of time provided to make the total payment comes as a welcome change as it enables the buyer to get some additional time to make the payment. In other words, this window of eighteen months shall prove to provide some relief and financial ease to the buyer with respect to closing the transaction.

Earlier, when an investor wanted to transfer his shares, the total consideration for such transfer was to be paid upfront at the time of taking delivery and an escrow mechanism was permitted (with several restrictions) under the automatic route for a maximum period of only six months. This led to a number of complications especially when Options Contract(s) were in place, as the person making the purchase had to arrange for a huge sum of money in a short period of time. Adding to the woes of the parties was the fact that the RBI had disallowed the fixation of a price prior to exercising such an Option. Consequently, it often led to sudden realization of one’s financial obligations and the mounting of an unanticipated burden when the price of the security was determined at the time of exercising the Option.

A concern which may arise is the loss one party may incur because of the fluctuating currency exchange rates, however, this has been addressed by the Regulation itself as it provides for an escrow arrangement for the allowed twenty five per cent between the buyer and the seller, if both parties mutually agree.

Alternatively, an indemnity may be furnished by the seller for twenty five per cent of the consideration for a period of eighteen months if buyer pays the entire consideration to ease up the financial burden on him. This would act as a deterrent to litigious claims as payments will be guaranteed even in situations where the buyer may default on his dues.

The amendment plays out favorably for the buyer in two ways; it gives him a comfortable timeline to meet his payment obligations while using it to protect himself from any breach of warranties on part of the seller by securing the indemnity rights. Secondly, it gives him a financial edge by saving him the expense of payment of interest for a period of eighteen months on such deferred payments.

However, there are some ambiguities in the Regulation with regard to determining who the constructive owner of the shares would be during the eighteen month period of deferment till the closing of the transaction. This may become a point of contention when benefits are to be conferred on members like payment of dividend, issue of bonus shares and so on. There is also no time period prescribed for the payment of indemnification in case of a default by a buyer with regard to payments to be made to the seller if it’s not decided by the parties contractually.

On the whole, this will be widely hailed as a move on part of the Government to make the transfer/issue of shares and securities smooth and easy. It is also indicative of the government’s increasing liberal outlook on making entry and exit from the Indian markets more conducive to investors by bringing it in line with the globally accepted risk allocation mechanisms. Coupled with other initiatives like Make in India and the thrust on bringing in Foreign Direct Investment, this amendment will surely bring more goodwill and trust in the Indian institutional setup.